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US Dollar falls to 6-week low with all eyes on interest rate moves

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By David Henry

NEW YORK (Reuters) -The dollar slumped to a six-week low against other major currencies on Monday as markets sorted out the plunge in U.S. Treasury yields last week after the Federal Reserve reiterated that any spike in inflation is likely to be temporary.

Improved risk sentiment shown by the recent rally in global stocks to record highs also weighed on the greenback.

The dollar index fell 0.58% to 91.082, continuing a downtrend that started at the end of March.

With the moves, the British pound gained 1% to come within a hair of $1.40 for the first time since March 18. More evidence of the economic recovery in Britain from the pandemic is expected from data to be released later this week.

The greenback’s weakness was pronounced across the board, with the currency hitting multi-week lows against other major peers in the G10 group of currencies, including the Japanese yen, the Swiss franc, the Australian dollar and the New Zealand dollar, and the euro.

The moves are the reverse of what was happening in the first three months of the year when the dollar gained against the same major currencies as yields rose on U.S. Treasuries and offered higher returns on the greenback, said Joseph Trevisani, senior analyst at FXSTREET.COM.

The degree of the dollar’s weakness during Monday trading seemed to track the yield on the 10-year Treasury which was last up slightly to $1.5994 after having plunged to 1.5280% on Thursday from a one-year high of 1.7760% in March.

The dollar index had gained 3.6% in the first three months of the year before turning down.

“Indeed, the USD rally is all but distant memory by now and the currency’s underperformance seems to reflect the apparent divergence in the outlook between the slumping UST yields and the rather perky bond yields elsewhere,” said Valentin Marinov, head of G10 FX research at Credit Agricole.

“This is almost the exact opposite of the moves we saw in March,” Marinov said.

The euro rose above $1.20 for the first time since March 4 to $1.2037 in the afternoon in New York. The European Central Bank meets on Thursday with internal divisions over the pace of bond-buying, extended COVID-19 lockdowns and potential delays to the EU recovery fund forming the backdrop.

The market is in a period of consolidation in U.S. yields and the dollar exchange rates, according to Masafumi Yamamoto, the chief currency strategist at Mizuho Securities in Tokyo.

The dollar bought 108.135 yen on Monday afternoon and reached its weakest level since March 5.

MSCI’s emerging market currency index hit its highest level in a month and last traded 0.15% higher on the day.

Fed Governor Christopher Waller said on CNBC on Friday that the U.S. economy “is ready to rip” as vaccinations continue and activity picks up, but a rise in inflation is likely to be transitory, echoing comments from other U.S. central bank officials, including Chair Jerome Powell, over the past week.

Their statements have clashed with market expectations that Fed officials will see signs of rising inflation in strong economic data and decide to tighten monetary policy sooner than they have indicated.

The currency and bond markets are looking to two events on Wednesday for clues to where interest rates are going: An auction of $24 billion of 20-year U.S. Treasuries and statements from the Bank of Canada about when it might cut bond purchases and allow rates to rise.

The Bank of Canada may foreshadow what is coming for U.S. rates by signalling a tightening of monetary policy, said Trevisani. “That’s the direction the Fed is going to have to go, too, eventually,” he said.

Bitcoin slipped about 1% to $55,782 on Monday afternoon in New York in a day of relatively steady trading after plunging on Sunday.

Data website CoinMarketCap cited a blackout in China’s Xinjiang region, which reportedly powers a lot of bitcoin mining, for the selloff.

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Currency bid prices at 3:13PM (1913 GMT)

Description RIC Last U.S. Close Pct Change YTD Pct High Bid Low Bid

Previous Change

Session

Dollar index

91.0820 91.6180 -0.58% 1.224% +91.7480 +91.0310

 

Euro/Dollar

$1.2037 $1.1983 +0.45% -1.48% +$1.2048 +$1.1943

 

Dollar/Yen

108.1350 108.7900 -0.60% +4.66% +108.8250 +108.0100

 

Euro/Yen

130.15 130.34 -0.15% +2.54% +130.3200 +129.7100

 

Dollar/Swiss

0.9149 0.9201 -0.57% +3.40% +0.9215 +0.9130

 

Sterling/Dollar

$1.3986 $1.3850 +0.99% +2.38% +$1.3993 +$1.3811

 

Dollar/Canadian

1.2535 1.2510 +0.20% -1.56% +1.2544 +1.2472

 

Aussie/Dollar

$0.7756 $0.7734 +0.30% +0.84% +$0.7784 +$0.7706

 

Euro/Swiss

1.1013 1.1023 -0.09% +1.91% +1.1029 +1.0993

 

Euro/Sterling

0.8606 0.8661 -0.64% -3.73% +0.8672 +0.8590

 

NZ

Dollar/Dollar $0.7177 $0.7148 +0.43% -0.03% +$0.7197 +$0.7117

 

Dollar/Norway

8.2930 8.3665 -0.79% -3.34% +8.4110 +8.2830

 

Euro/Norway

9.9861 10.0290 -0.43% -4.59% +10.0532 +9.9704

 

Dollar/Sweden

8.4002 8.4277 +0.09% +0.00% +8.4762 +8.3784

 

Euro/Sweden

10.1121 10.1032 +0.09% +0.35% +10.1257 +10.0819

 

(Reporting by David Henry in New York and Ritvik Carvalho in London; Additional reporting by Kevin Buckland in Tokyo; Editing by Larry King; Paul Simao and Andrea Ricci)

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Nigeria launches eNaira amid hope, scepticism – and plenty of uncertainty

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Nigeria on Monday became the first African nation to launch a digital currency – the eNaira – a move its leaders said will expand access to banking, enable more remittances and even grow the economy by billions of dollars.

Africa’s most populous nation joins the Bahamas, the first to launch a general purpose central bank digital currency, known as the Sand Dollar, in October. China has ongoing trials and Switzerland and the Bank of France have announced Europe’s first cross-border experiment.

But experts and cryptocurrency users in the continent’s biggest economy say the fact that there are more questions than answers regarding the eNaira – and a large amount of worry over the consistency of Central Bank (CBN) rules – means the government faces a tough path to make the eNaira a success.

Central Bank Governor Godwin Emefiele said during Monday’s launch that there had been “overwhelming interest and encouraging response”, adding that 33 banks, 2,000 customers and 120 merchants had already registered successfully with the platform, which is available via an app on Apple and Android.

Some 200 million nairas’ worth of eNaira, which will maintain parity with the traditional currency, has been issued to financial institutions, he said. President Muhammadu Buhari said use of the currency could grow the economy by $29 billion over ten years, enable direct government welfare payments and even increase the tax base.

Nigeria’s young, tech-savvy population has eagerly adopted digital currencies. Cryptocurrency use has grown quickly despite a Central Bank ban in February on banks and financial institutions dealing in or facilitating transactions in them.

Nigeria ranked seventh in the 2021 Global Crypto Adoption Index compiled by research firm Chainalysis. Official digital currencies, unlike crytocurrencies such as bitcoin, are backed and controlled by the central bank.

But some of what drove Nigeria’s enthusiastic adoption of cryptocurrencies was the Central Bank’s own shifting rules regarding accessing foreign currency – and the naira’s plunging value on parallel markets that saw savings shrink.

“It’s not clear looking at the CBN’s body of work that Nigerians would be comfortable using this,” said Ikemesit Effiong, head of research with Lagos-based consultancy SBM Intelligence.

He added that the CBN had not yet made clear whether users could transfer eNaira back into traditional naira, whether they could use cryptocurrency to buy or sell the eNaira or even whether there would be physical locations to use and transfer eNaira, or whether it would be entirely digital.

“There are more questions than answers, even though we are looking at the launch of this digital currency. The fact that this is the case so late in the game is concerning,” he told Reuters.

The CBN issued a nine-page FAQ, which said eNaira users would access it via the phone app, internet banking or a code dialled from mobile phones, but it did not address transferability or other questions raised by Effiong.

Only three local television channels were allowed to attend the launch, and officials took no questions.

For 28-year-old Ebuka Joseph, an art dealer and enthusiastic cryptocurrency user in the commercial capital, Lagos, the uncertainty means he will stay on the sidelines, for now.

His concerns centre on whether he would easily be able to change eNaira back into normal currency.

“I have had issues trusting the central bank … because they have already banned crypto,” he told Reuters. “I want to hear from people, see people use it, before I venture into it.”

 

(Reporting by Libby George; Editing by Nick Macfie)

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Explainer: Climate change: what are the economic stakes?

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COP26 climate talks in Glasgow starting next Sunday may be the world’s best last chance to cap global warming at the 1.5-2 degrees Celsius upper limit set out in the 2015 Paris Agreement.

The stakes for the planet are huge – among them the impact on economic livelihoods the world over and the future stability of the global financial system.

Here are 10 climate change-related questions that economic policy-makers are trying to answer:

1) HOW MUCH DOES CLIMATE CHANGE COST? From floods and fires to conflict and migration: economic models struggle with the many possible knock-on effects from global warming. The ballpark IMF estimate is that unchecked warming would shave 7% off world output by 2100. The Network for Greening the Financial System (NFGS) group of world central banks puts it even higher – 13%. In a Reuters poll of economists, the median figure for the output loss in that scenario was 18%.

2) WHERE IS THE IMPACT GOING TO BE FELT HARDEST? – Clearly, the developing world. Much of the world’s poor live in the tropical or low-lying regions already suffering climate change fall-out like droughts or rising sea levels. Moreover their countries rarely have the resources to mitigate such damage. The NFGS report projects overall output losses of above 15% for much of Asia and Africa, rising to 20% in the Sahel countries.

3) WHAT DOES THAT MEAN FOR INDIVIDUAL LIVELIHOODS? Climate change will drive up to 132 million more people into extreme poverty by 2030, a World Bank paper last year concluded. Factors included lost farming income; lower outdoor labour productivity; rising food prices; increased disease; and economic losses from extreme weather.

4) HOW MUCH WILL IT COST TO FIX IT? Advocates of early action say the sooner you start the better. The widely used NiGEM macroeconomic forecast model even suggests an early start would offer small net gains for output thanks to the big investments needed in green infrastructure. The same model warns of output losses of up to 3% in last-minute transition scenarios.

5) WHO LOSES OUT IN A “NET ZERO” CARBON WORLD? Primarily, anyone with fossil fuel exposure. A report by think tank Carbon Tracker in September estimated that over $1 trillion of business-as-usual investment by the oil and gas sector would no longer be viable in a genuinely low-carbon world. Moreover the IMF has called for the end of all fossil fuel subsidies – which it calculates at $5 trillion annually if defined to include undercharging for supply, environmental and health costs.

6) WHAT SHOULD CARBON REALLY COST? Tax or permit schemes that try to price in the damage done by emissions create incentives to go green. But so far only a fifth of global carbon emissions are covered by such programmes, pricing carbon on average at a mere $3 a tonne. That’s well below the $75/tonne the IMF says is needed to cap global warming at well below 2°C. The Reuters poll of economists recommended $100/tonne.

7) WOULDN’T THAT LEAD TO INFLATION? – Anything which factors in the polluting cost of fossil fuels is likely to lead to price rises in some sectors – aviation for example. That could in turn lead to what central banks define as inflation – broad-based and durable price rises across the whole economy. Yet history shows this hasn’t necessarily been the case: carbon taxes introduced in Canada and Europe pushed overall prices lower because they cut into household income and hence consumer demand, a recent study showed. It is also true that doing nothing could lead to inflation: a European Central Bank paper last year warned of food and commodity price rises from extreme weather events and the land shortages being caused by desertification and rising sea levels.

8) ARE GREEN ADVANCES REALLY DECOUPLING EMISSIONS FROM ECONOMIC GROWTH? Genuinely sustainable growth implies that economic activity can grow as needed without adding yet more emissions. This is the holy grail of “absolute decoupling”. But so far, any decoupling has either been largely relative – in the sense of merely achieving higher rates of economic growth than gains in emissions – or achieved by shifting dirty production from one national territory to another. And that is why, for now, global emissions are still rising.

9) WHO BEARS THE BRUNT OF TRANSITION? The idea of “Just Transition” has been espoused by bodies such as the European Union to acknowledge that the transition to net zero should happen in a fair way – for example by ensuring low-income groups are not made worse-off. At a global scale, the rich countries which since their industrial revolutions have generated the bulk of emissions have promised to help developing countries transition via $100 billion of annual transfers – a promise so far not fulfilled.

10) COULD THIS SPARK A FINANCIAL CRISIS? The global financial system needs to be insulated against both the physical risks of climate change itself and the upheavals likely to happen during a transition to net zero. Central banks and national treasuries are calling on banks and other financial players to come clean about the exposure of their books to such risks. The ECB and other regulators have made it clear there is a long way to go on this.

 

(Editing by Giles Elgood)

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Bank of Canada to raise rates in Q3 next year, possibly sooner: Reuters poll

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The Bank of Canada will raise rates as early as the third quarter of next year, at least three months earlier than previously expected, according to economists polled by Reuters who see a risk that the increase could come even sooner.

Just last month economists were almost evenly split on the risk of higher rates; now nearly all are saying sooner rather than later.

That shift in view, based on intensifying inflation pressures – owing to global supply chain bottlenecks, labour shortages and rising energy costs – is increasingly shared by forecasters around the world.

“With inflation pressures continuing to build globally, Canada‘s activity story looking robust, and with the jobs market strengthening more quickly than in most other countries, the odds are increasingly stacked in favour of earlier and more aggressive policy tightening next year,” said James Knightley, chief international economist at ING.

That view is in line with the central bank’s latest Business Outlook Survey, which reported firms anticipating stronger demand as the COVID-19 pandemic fades, but supply constraints threatening to limit sales and raise costs.

Canada‘s inflation rate accelerated to an 18-year high of 4.4% last month, driven by high gas prices, soaring housing costs and rising food prices, putting pressure on the BoC to consider hiking rates before long.

While the median view of economists in an Oct. 18-22 poll showed the BoC would keep rates unchanged at 0.25% through the first half of next year, rates are expected to rise by 25 basis points to 0.50% in the third quarter.

Financial market traders are pricing in the first hike as early as April.

Forecasts from economists on whether rates will go up in Q3 were on a knife’s edge. But the risk to their expectations was clear: 90% of respondents, or 18 of 20, said a BoC move would come earlier rather than later.

BIG DIFFERENCE

Based on a smaller sample of respondents, the BoC was then forecast to hike in the first quarter of 2023 to 0.75% and end the year at 1.25%.

If the poll is correct, the BoC will notably diverge from the U.S. Federal Reserve, which is expected to keep rates unchanged through the end of next year. [ECILT/US]

“The big difference between the two countries is (that) in Canada employment is now back to the pre-pandemic level, whereas in the U.S., it’s not,” said Stephen Brown, senior Canada economist at Capital Economics.

Inflation was expected to remain above the central bank’s target and to rise to 4.1% this quarter, up from 3.1% predicted three months back. It was then predicted to ease, averaging between 2.2% and 3.7% in each quarter next year. But next year’s 2.5% average forecast is up from 2.2% predicted in July.

“The second wave of inflation in 2022 will be much more interesting, where we will see some increasing wages alongside demand coming from people spending money,” said Benjamin Tal, deputy chief economist at CIBC Capital Markets.

“That semi-normal to me would be the more risky inflation because it will be demand-driven, and if that’s the case, you would love to see the Bank of Canada and the Fed reacting to it,” said Tal, who expects both central banks to raise rates in the second half of 2022.

Growth was expected to take a hit this year. The export-driven economy would grow on average 5.0% this year, a sharp downgrade from 6.2% predicted three months back. For next year, it was expected to grow 4.0%, unchanged from the previous poll.

The BoC will also taper its asset purchase programme by C$1 billon from its current C$2 billion at its Oct. 27 meeting, the poll showed. That is also when the bank will provide its quarterly update on growth and inflation.

 

(Reporting by Mumal Rathore; Additonal reporting by Sarupya Ganguly; Polling by Prerana Bhat and Susobhan Sarkar; Editing by Ross Finley and David Holmes)

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